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It’s hard to fathom, right? Yet, that’s how Detroit looks when
viewed through a free-enterprise lens.

And it is also why Detroit may never recover in our lifetime.

You can’t really judge Detroit, which filed for Chapter 9
bankruptcy protection on Thursday, as a business. After all, it
is a creature of state. It is also, though, a fairly good example
of how an anti-competitive approach is doomed to failure. One
doesn’t expect a government to become a business, but many
cities, notably Atlanta, Austin and New
York, have found a way to inject a sense of public-private
partnership to attract and support new businesses.

Not so in Detroit. Much has been made about its over-dependence
on the auto industry, but it is interesting to note that just one
automaker -- GM -- chose to have its headquarters there. Chrysler
and Ford are outside the city limits. True, many citizens worked
for the auto industry, but they often found themselves leaving
town to go to work.

It didn’t have to be that way. A union-driven protectionist bent
against foreign carmakers made Detroit in the 1970s and 1980s
feel like a keep under siege. Truth was, foreign automakers
wanted a home in the U.S. Market forces suggested the Japanese
could save money and sell more cars if they made them here.
Detroit would have been a natural place to hang their hat, but
most chose California instead. Detroit saw that as a victory.

Even U.S. automakers wanted to motor from the city. The most
innovative corporate idea from one of the Big Three in the last
30 years was GM’s creation of the Saturn brand, which gave the
company a bold new design and changed the way cars were sold and
how salespeople were compensated. GM launched that brand not in
its own hometown, but in Spring Hill, Tenn., which is about as
opposite of Detroit as you can get. (GM, sadly, would later apply
Detroit-style mismanagement and ultimately drive the brand into
failure.)

Even the music scene didn’t help Detroit. With apologies to both
Motown and Eminem, the city never found a way to convert that
creativity into sustainable dollars at home. Los Angeles and New
York have made more money off Detroit’s homegrown art.

Why was it this bad? Because Detroit did nothing to change its
anti-business mindset. It is, after all, a union town and unions
are very good at driving members to the ballot box. They also
want to make sure than any big enterprises in town provides union
jobs. Is it any wonder why Elon Musk decided not to build the
Tesla in Detroit, or that Volkswagen has embraced the South as
its American manufacturing hub?
Coddling union membership only drove Detroit deeper into its
hole. As protectionism led to a decline in jobs, people fled the
city. One of the saddest statistics is the population flight. In
2011, the Census Bureau noted that Detroit saw a 25 percent
decline over just a decade, to 713,777. It had about 2 million
half a century ago, when it was the fifth-largest city in
America.

Citizens are a government’s customers, since government derives
its revenue from taxation. Most governments rely on corporate
taxes to fuel its coffers, but, again, businesses were steering
clear. So a smaller population faced an ever-increasing tax bill
-- and chose not to pay it. In February, the Detroit News found
that roughly half of the city’s property owners didn’t pay what
they owed.

As the customers reduced revenue, city employees fought any
reduction in pay or benefits. There is the famous story of the
farrier on the Detroit Water and Sewer Department’s payroll, to
the tune of $56,000 in annual pay and benefits. Farriers change
horseshoes, which would otherwise come in handy but that
department doesn’t have a horse. (Perhaps they kept him for good
luck?) Public-employee unions like the teachers, police and
municipal workers have all fought givebacks. That approach makes
the union leadership look tough, but it also mirrors what
happened at Hostess Brands. All that did was put union workers
out of work and give America smaller, lower-calorie Twinkies.

That made Detroit have to borrow heavily, piling up more than $18
billion in debt. This was not borrowing to support future growth,
but to just maintain what Detroit had in front of it.
Thirty-eight percent of its expenditures went to legacy issues,
like pension payments.

So, in business terms, Detroit was sunk when its customers
(reduced revenue) and its employees (increased costs) teamed up
to destroy it. Bankruptcy protection, though, is exactly that:
protection. Bankruptcy proceedings are supposed to give any
entity breathing room to negotiate its obligations and get a
fresh start. But, so far, the biggest burden is on the shoulders
of the creditors, the free-marketeers who took a chance and
bought Detroit’s bonds, hoping for a large return and letting the
city stay afloat. They will be paid pennies on the dollar of what
they are owed. Will the unions and pension funds make
commensurate changes?

History says no, and that is where Detroit runs the risk of never
coming back. If the real pain is felt only in the bond market, it
will be harder for the city to have access to debt in the future
to fund its renaissance. Detroit will become the municipal
equivalent of the brother-in-law who always borrows money and
drinks all your beer.

The city will also not learn its lesson. They say everyone is
recovered the first day they leave rehab, but many go down the
Lohan highway and end up locked away in Malibu again. Detroit
could clear its past debts, but failing to address its revenue
and cost problems in a meaningful way will only put it back in
bankruptcy court. The hard choices of lower salaries, reduced
services, trimmed pensions and re-investment need to me made, but
it looks like there is little political will to achieve those
ends.

Businesses know that bankruptcy is not always the final chapter.
In fact, it can be a great springboard for innovation and wealth
creation. Phil Anschutz is a billionaire because he saw a way to
buy movie theaters out of bankruptcy and make them profitable
again. Wilbur Ross revived investment in the U.S. steel industry
by buying assets on the cheap out of bankruptcy.

But neither Anschutz nor Ross can rescue Detroit, as much as
Libertarians wish there were a mechanism to do so. Instead, it is
telling that many of people affected by the bankruptcy are
looking for a federal bailout of the city. Looking for a
government-driven solution to Detroit’s problems is the clearest
sign yet that it will never learn.